Are an HSA and an FSA the Same?

Health Saving Accounts and Flexible Spending Accounts are both tax-free ways to save on health care expenses. They both defray the costs of co-pays and deductibles when used in conjunction with health insurance. Despite their similarities, they are very different health care tools. Deciding on which one to invest in is dependent on several factors.

Health Spending Accounts

• Health Spending Accounts are savings accounts in which the funds can only be used for medical expenses. Contributions to the account are deductible on tax returns. IRS guidelines stipulate that account holders must be covered by an HSA-qualified High Deductible Health Plan, or HDHP. An HDHP plan is an insurance plan that carries a deductible of $1000 or more. Additionally only individuals under age 65 and not covered by Medicare are eligible to open an account. The IRS sets annual contribution limits for HSA accounts.

Flexible Spending Accounts

• Flexible Spending Accounts are offered through employers in addition to regular insurance plans. Employees contribute to the account through payroll deduction. The amount of contribution is set at the beginning of the plan year by the employee. There is no limit to the amount that can be contributed to an FSA. Contributions to the account are tax free. The FSA account is a use it or lose it plan and all funds must be utilized during the plan year.

HSA Vs. FSA

• Both accounts offer tax free dollars for out-of-pocket health expenses such as prescriptions, co-pays and deductibles. FSAs are administered through an employer. HSA accounts can be opened through a bank or credit union in addition to employer sponsored plans. Funds held in HSA accounts roll over from year to year. There is no time limit in which to use the funds. After the HSA account holder turns 65, they may use the funds for non-medical expenses as well.

Benefits

• The Health Savings Account and Flexible Spending Account offer the opportunity to save for future medical expenses. Expenses include prescriptions, vision care, dental and specialist visits. These accounts allow individuals to have choice and control over their health care funds. There are some financial institutions that allow HSA dollars to be invested into stocks, bonds and mutual funds. HSA plans are portable, meaning that they are not affected by job change or relocation.

Considerations

• When setting up the annual contribution for a Flexible Spending Account, it is important not to over estimate the amount you will use. Funds remaining in the account at the end of the plan year must be forfeited.

  Starting in 2010, OTC medications will no longer be covered by FSA or HSA plans unless accompanied by a doctor's prescription. This will directly affect the amount of money put into these accounts. OTC medications include aspirin, cough medicines and first aid supplies. This change is part of the new health care law. Another change slated for 2013 will cap the amount of money that is contributed to FSAs.